Do agricultural subsidies crowd out or stimulate rural credit institutions? Cover Image

Do agricultural subsidies crowd out or stimulate rural credit institutions?
Do agricultural subsidies crowd out or stimulate rural credit institutions?

The Case of CAP Payments

Author(s): Pavel Ciaian, Ján Pokrivčák, Katarina Szegenyova
Subject(s): Agriculture, Economic policy, Evaluation research, Financial Markets
Published by: CEPS Centre for European Policy Studies
Keywords: Agricultural subsidies crowd; rural credit institutions; agricultural policy; farm bank loans;
Summary/Abstract: In this paper we estimate the impact of subsidies from the EU’s common agricultural policy on farm bank loans. According to the theoretical results, if subsidies are paid at the beginning of the growing season they may reduce bank loans, where as if they are paid at the end of the season they increase bank loans, but these results are conditional on whether farms are credit constrained and on the relative cost of internal and external financing. In the empirical analysis, we use farm-level panel data from the Farm Accountancy Data Network to test the theoretical predictions for the period 1995–2007. We employ fixed-effects and generalised method of moment models to estimate the impact of subsidies on farm loans. The results suggest that subsidies influence farm loans and the effects tend tobe non-linear and indirect. The results also indicate that both coupled and decoupled subsidies stimulate long-term loans, but the long-term loans of large farms increase more than those of small farms, owing to decoupled subsidies. Furthermore, the results imply that short-term loans are affected only by decoupled subsidies, and they are altered by decoupled subsidies more for small farms than for large farms; however, when controlling for endogeneity, only the decoupled payments affect loans and the relationship is non-linear.

  • Print-ISBN-13: 978-94-6138-131-6
  • Page Count: 25
  • Publication Year: 2011
  • Language: English